It's hard enough to manage and grow one restaurant chain successfully. Therefore it's hard to fault Darden Restaurants (NYSE:DRI) for wanting to dump the laggard of its large portfolio of restaurant chains. The company plans to either sell or spin off its Red Lobster concept as a separate entity. While some of Darden's other chains are doing quite well, Red Lobster is bringing down its overall results. Is now the time to consider Darden or should investors look to peers Bloomin Brands (NASDAQ:BLMN) and Texas Roadhouse (NASDAQ:TXRH) instead?
Darden reported fiscal second-quarter results on Dec. 19. Overall sales improved 4.6% to $2.05 billion. Earnings per share nosedived 42.3% to $0.15. At its three largest chains, same-store sales jumped 5% at LongHorn Steakhouse, slipped 0.6% at Olive Garden, and got crushed 4.5% at Red Lobster.
In November, the situation improved remarkably for Longhorn and Olive Garden but it went from bad to worse at Red Lobster. Same-store sales improved 6.8% at Longhorn and 1.5% at Olive Garden, and dove 4.6% at Red Lobster. The company adjusted its full year estimates downward "largely to a meaningful downward adjustment in the forecast of same-restaurant sales results at Red Lobster."
CEO Clarence Otis mentioned that the industry has been plagued with "relatively low levels of consumer demand in each of the past several years for restaurants generally, and for casual dining in particular." He pointed out that it's gotten worse since June, but companies can still do well when they "create compelling value." This is clear from the results at its LongHorn Steakhouse and Olive Garden chains.
Otis believes that Red Lobster and the rest of its restaurants are "increasingly divergent," and Darden will do better if it separates out Red Lobster and focuses its resources on growing its more successful chains. Red Lobster will get its own CEO and board of directors and become a completely separate entity. Otis points out that Red Lobster's "strategy and operational requirements diverge substantially from those of our other brands." This could prove to be a lucrative move for shareholders.
In terms of total sales, Red Lobster provided 27.4% of Darden's sales last quarter yet it represented 32.4% of the number of physical restaurant locations for the company. This means that each restaurant on average is lagging behind the rest of the group. While LongHorn Steakhouse only provided 15.6% of sales, it's the fastest-growing chain Darden owns. LongHorn saw overall sales grow by 15.6% as it added 11.5% more restaurants for a total of 445 locations. After Red Lobster is out of the way, the results of LongHorn could stand out more which could help to turn Darden into more of a growth stock with potentially a higher multiple in terms of valuation.
More sizzle, more steak
The focus on steak appears to be a wise idea in this environment. Bloomin' Brands(NASDAQ:BLMN) owns and operates four restaurant chains. Last quarter, only one of its concepts -- Fleming's Prime Steakhouse -- showed same-store sales growth which came in at 4.2%. It helped carry Bloomin' Brands to post a 43% increase to $0.10 in pro forma earnings per share. Bloomin' Brands expects 2014 to show a 2% gain in same-store sales.
Meanwhile, Texas Roadhouse(NASDAQ:TXRH) reported well-done results. Overall sales rose 8% to $335 million while same-store sales popped 2.6% at company-owned locations and 4% at franchises. Following the quarter's end, Texas Roadhouse saw a 3.4% jump in same-store sales for the first four weeks. Texas Roadhouse is so confident about the future for steak that it plans to have opened 28 more locations, for a 10% increase, this year and another 25 to 30 locations next year.
Foolish final thoughts
While the results from Red Lobster are a disappointment, this seems like the right move for Darden. By focusing on its strengths and letting go of its weaknesses, it can build a much stronger company faster. Fools who have a long-term outlook may want to put Darden on their watch lists for a possible entry. Once Red Lobster is out of the way, future earnings reports should look impressive.
Nickey Friedman has no position in any stocks mentioned. The Motley Fool recommends Texas Roadhouse. The Motley Fool owns shares of Darden Restaurants. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.